In re Sweetwater

• Decision Date: 01 June 1984
• Docket Number: Bankruptcy No. 83A-02582.
• Citation: 40 BR 733
• Parties: In re SWEETWATER, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Utah

40 B.R. 733 (1984)

In re SWEETWATER, et al., Debtors.

Bankruptcy No. 83A-02582.

United States Bankruptcy Court, D. Utah, C.D.

June 1, 1984.

Thomas G. Rohback, LeBoeuf, Lamb, Leiby & MacRae, Salt Lake City, Utah, for debtor.

Herschel J. Saperstein and Vernon L. Hopkinson, Watkiss & Campbell, Salt Lake City, Utah, for First Security Financial.

MEMORANDUM OPINION

JOHN H. ALLEN, Bankruptcy Judge.

This case raises the question of whether a lessor is entitled to adequate protection prior to the debtor's assumption or rejection of an unexpired lease. This Court holds that a lessor is not entitled to adequate protection.

FACTUAL AND PROCEDURAL BACKGROUND

The debtor, Sweetwater, is primarily engaged in the business of condominium timesharing. Sweetwater and its subsidiaries own, develop, and manage timeshare properties in resort locations including Bear Lake, St. George, Lake Powell and Park City, Utah; Jackson Hole, Wyoming; San Diego, Palm Springs and San Francisco, California; Lake Conroe, Galveston and South Padre Island, Texas; Waikiki and Kauai, Hawaii; and Acapulco, Puerto Vallarta, Cancun and Mazatlan, Mexico. The timeshare plans sold by the debtor consist primarily of fee ownership programs, except for the Mexico properties which are sold as right-to-use programs.

Sweetwater filed a petition under Chapter 11 of the Bankruptcy Code on September 23, 1983. Thereafter, First Security Financial (First Security), filed motions requesting the Court (1) to set a date by which the debtor must assume or reject certain leases with First Security; (2) to compel the debtor to adequately protect First Security's interest in the leased property for the period between the filing of the petition and the date of the debtor's assumption or rejection of the leases; and (3) to grant relief from the automatic stay in the event adequate protection is not provided.

First Security's motions concern various leases between itself as assignee of the interest of MFT Leasing Company, and the debtor, as lessee. The personal property which is the subject of the leases consists of snowmobiles, a computer, office furniture, lawn mowers, boat motors, stereo equipment and other property which will rapidly depreciate in value. Since the filing of its petition, the debtor has continued to retain possession of and use the leased property, but has made no payments under the terms of the leases. The parties filed a stipulation with the Court in which they agreed on the rate of depreciation per month and the fair rental value of the leased property.

A hearing was held to consider First Security's motions. By stipulation of the parties, the only issue presented to the Court was whether First Security, as a lessor, is entitled to adequate protection of its interest in the leased property during the period between the filing of the petition and the date of the debtor's assumption or rejection of the leases. At the conclusion of the hearing the matter was taken under advisement. The Court now renders the following opinion.

ADEQUATE PROTECTION AND THE LESSOR'S INTEREST

The concept of adequate protection is found in Section 361 of the Bankruptcy Code, which provides:

When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by—

(1) requiring the trustee to make periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity\'s interest in such property;

(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity\'s interest in such property; or

(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity\'s interest in such property.

The phrase "adequate protection" does not delineate a term of precise meaning and is not defined in any section of the Code. In re Alyucan Interstate Corp., 12 B.R. 803, 805, 7 B.C.D. 1123, 1124 (Bkrtcy. D.Utah 1981); In re Rogers Development Corp., 2 B.R. 679, 683, 5 B.C.D. 1392, 1394 (Bkrtcy.Va.1980).¹ Rather, Section 361 provides three non-exclusive methods of providing adequate protection. The methods are illustrative and not intended to be exhaustive.

The Bankruptcy Code is not merely a connected group of words, phrases and sentences, existing in a vacuum. It is the culmination of eight years' work by a Congressional Commission, two Congressional committees and numerous outside groups. 124 Cong.Rec. H11089 (daily ed. Sept. 28, 1978) (remarks of Representative Edwards). It must be considered in the context of its background and environment. For this reason, in order to ascertain its meaning, it is necessary to consider its legislative history.²

The Bankruptcy Code evolved from the study and recommendations of the Commission on Bankruptcy Laws of the United States. The Commission was created in 1970 by Public Law 91-354. Its nine members included bankruptcy practitioners, scholars, district court judges, two Congressmen and two Senators. On July 30, 1973, the Commission filed its report.³

Part II of the Commission's Report consisted of a proposed statute, "The Bankruptcy Act of 1973," and accompanying explanatory notes. Section 7-203 of this proposed statute would have provided adequate protection for lessors. That section states:

Use of Property Leased or Subject to a Lien.

(a) Use of Property. Notwithstanding the terms of a lease of personal property or a security agreement,

(1) the trustee, receiver, or the debtor when no trustee or receiver is appointed, may use property of the estate subject to a lien, and the proceeds thereof, and personal property leased pursuant to a lease that has not been assumed, in the operation of the business of the debtor, until termination of the stay prescribed by section 4-501; and

(2) property acquired by the trustee or the debtor after the date of the petition shall not be subject to any lien resulting from a security agreement entered into by the debtor prior to the date of the petition.

(b) Relief from or Modification of Stay. Pursuant to the Rules of Bankruptcy Procedure and section 4-501(c), a secured party or lessor may file a complaint (1) to terminate the stay, or (2) to modify the stay by imposing such conditions on the use of the property or the proceeds thereof as will adequately protect the secured party. The trustee or debtor shall have the burden of proving that the value of the secured creditor\'s interest in the property or the property leased as of the date of the petition is adequately protected.⁴

The Commission's proposed legislation was introduced in the 93rd Congress⁵ but no action was taken. It was reintroduced in the 94th Congress.⁶ The National Conference of Bankruptcy Judges, which opposed a number of the provisions in the Commission's proposed act, drafted its own version. The Judges' bill was likewise introduced in the 93rd Congress⁷ and reintroduced in the 94th Congress.⁸

Section 4-715 of the Judges' bill was similar to Section 7-203 of the Commission proposal and provided for adequate protection to lessors. It states:

Use of Property Leased or Subject to a Lien.

(a) Use of Property.—Notwithstanding the terms of a lease of property or a security agreement, the trustee, or the debtor when no trustee is appointed, may, until termination of the stay prescribed by section 4-501, use—

(1) rents and profits of real estate owned or held under lease by the debtor;

(2) property leased pursuant to a lease that has not been assumed; and

(3) property of the estate subject to a lien, other than the proceeds of collateral, and may continue to use the proceeds of collateral upon the filing of an involuntary petition or upon the filing of a voluntary petition, if notice of the filing of the petition is served upon the secured party or parties by any form of mail requiring a signed receipt concurrently with the filing of the petition.

(b) After-Acquired Property.—Property acquired by the trustee or the debtor after the date of the petition shall not be subject to any lien resulting from a security agreement entered into by the debtor prior to the date of the petition.

(c) Relief from or Modification of Stay. —Pursuant to the Rules of Bankruptcy Procedure and section 4-501(c), a secured party or lessor may file a complaint (1) to terminate the stay, or (2) to modify the stay by imposing such conditions on the use of the property or the proceeds thereof as will adequately protect the secured party. The trustee or debtor shall have the burden of proving that the secured creditor\'s interest in the property or the property leased as of the date of the petition is adequately protected.

During 1975 and 1976, the Commission's bill and the Judges' bill were the subject of extensive hearings before subcommittees of the House and Senate Judiciary Committees.⁹ In those hearings, several witnesses expressed views respecting protection of the lessor's interest during reorganization proceedings. In a statement submitted to the House Subcommittee on Civil and Constitutional Rights, the American Association of Equipment Lessors made known the concerns of its members, as follows:

Section 4-602 of the bills should not deprive the lessor of his contractual right to terminate the lease or to prohibit its assignment in connection with a reorganization proceeding. At the very least, the bills should not allow the trustee in bankruptcy to assume or assign the lease unless all prior defaults are cured and the lessor receives adequate assurance that the trustee or assignee is able and

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